IMF Forecasts: The Heavy Weighting Of The Tourism Sector Explains Sharp Downward Revision In Spain’s Expected Growth

Spain's tourism industry has seen the biggest decline

Bankia Studies |The IMF’s estimates regarding the intensity of the current crisis are worsening. It acknowledges the coronavirus pandemic forced economies into what it has called the “Great Confinement,” which is necessary to save lives and relieve pressure on public health systems. However, it will lead to the worst recession since the Great Depression. As the Washington-based institution’s report was released, 75 per cent of countries were lifting many of the restrictions imposed. Meanwhile, the pandemic was still deepening in many of the emerging and developing economies. The IMF warns that in the absence of a vaccine, the scenario faced is very uncertain and the impact by sector and country will be very uneven.

The IMF forecast update presents an even weaker picture than its April report: world growth is cut by 1.9 percentage points in 2020, to -4.9%; and by -0.4 percentage points in 2021 to 5.4%. This deterioration in expectations occurs in both the developed and emerging economies. In 2020, none of the world’s major economies will avoid an annual contraction in GDP, with the possible exception of China, which could grow by a modest 1.0%. Moreover, with few exceptions, the recovery expected in 2021, despite its unusual intensity, would not compensate for the decline in GDP expected this year. With these new IMF estimates, the world economy would accumulate losses of some 12 trillion dollars in 2020-2021, compared to levels in January. In addition, this impact is expected to be more pronounced in the emerging economies, excluding China, than in the developed ones: at end-2021, the GDP of the developed economies will still be 6.1% lower than expected in January, while the emerging block, without China, will be more than 7.0% lower.

The IMF has cut its forecasts for the Spanish economy in 2020 from the -8% it estimated in April to -12.8%. For 2021, it estimates 6.3% growth in GDP, so that next year the level of GDP will still be 7.3% lower than in 2019 (4% in the previous forecast). The Spanish economy’s worse performance is mainly due to the heavy weighting of tourism activities in GDP. This sector has not only seen the biggest decline, but its recovery will be one of the toughest. Overall, this worsening of forecasts is not so much down to an initial bigger drop in activity, but to the perception that the consequences will be much more serious than previously foreseen.

In line with the worse outlook for activity, the IMF has also revised upwards its forecast for the public deficit, from the previous 9.5% to 13.9% in 2020 and 8.3% of GDP in 2021. Similarly, public debt will reach 123.8% this year, rising to 124.1% in 2021 (113.4% and 114.6% forecast in April).

This is the most severe cut amongst the developed countries compared to forecasts two months ago. It is only surpassed by France, where activity is forecast to collapse by 12.5% this year compared to 7.2% estimated just two months ago.